In this article I am discussing whether British American Tobacco (LSE: BATS) (NYSE: BTI.US) offers attention-grabbing value for money.
Price to Earnings (P/E) Ratio
British American Tobacco has been a reliable provider of solid earnings growth over the past five years. But the impact of rising health concerns about smoking habits, constraints on consumer spending power, and a thriving black market has seen the rate of expansion decelerate sharply during this period — indeed, growth of 5% last year compares starkly with the 19% rise posted in 2009.
And City analysts expect the business to record its first earnings decline for many moons in 2014, with a 1% fall currently pencilled in. But British American Tobacco is anticipated to strike back with a solid 9% rise in 2015.
Based on these forecasts, British American Tobacco currently changes hands on a P/E rating of 16.5 for 2014 and 15.2 for 2015. These readings are just above the 15 times prospective earnings that is generally regarded as reasonable value, although they still beat a forward average of 17.1 for the FTSE 100.
Price to Earnings to Growth (PEG) Ratio
On the back of this year’s anticipated earnings fall British American Tobacco fails to create a valid PEG rating. Next year’s predicted bounceback creates a reading of 1.7, although this falls outside the benchmark of 1 or below which generally represents blockbuster value relative to the firm’s growth prospects.
Market to Book Ratio
British American Tobacco’s book value, once total liabilities are deducted from total assets, comes out at around £6.9bn. This calculation creates a book value of £3.63 per share, creating a market to book ratio of 9.8. This readout appears incredibly inflated when tallied up against the yardstick of 1 which is widely regarded as bargain territory.
Dividend Yield
British American Tobacco’s sterling record of earnings growth has given it the firepower to consistently deliver market-beating dividend increases. And the City’s number crunchers expect the firm to keep payouts streaming higher, even in spite of this year’s slight earnings fall, with 2013’s 142.4p per share payment predicted to march to 146.8p in 2014 and to 157.2p in 2015.
These projections create appetising yields of 4.1% for 2014 and 4.4% for this year and next, comfortably outstripping a prospective average of 3.2% for the FTSE 100.
A Solid If Unspectacular Stock Selection
Looking at the metrics above, in my opinion British American Tobacco can hardly be considered a blistering share pick at current prices. I believe that the firm’s extensive exposure to developing markets — home to the vast majority of the world’s smokers — and aggressive moves into the e-cigarette market should underpin spectacular long-term earnings and dividend growth. But for those seeking excellent value in the meantime I reckon that more exciting stocks can be found elsewhere.
